Tag Archives: compensation

Pay Transparency: Where Is Your Organization on the Spectrum?


In August 2015, I wrote a post that took a decidedly guarded position on the benefits of pay transparency. That post was written in the context of the SEC’s pay ratio disclosure rules, requiring the disclosure of executive pay as compared to the average worker’s pay. I’ve been mulling the topic of pay transparency ever since then, wondering if I was too conservative. I recently attended a webinar on pay transparency sponsored by PayScale and BambooHR which caused me to adjust my thinking. This post deals with the merits of pay transparency as a management philosophy, rather than as a response to a government mandate.

The thrust of the PayScale/BambooHR webinar was that pay transparency is really a continuum of pay strategies. Each organization must decide where on the continuum to place its pay philosophy, based on the organization’s goals and desired culture.

If an employer decides to migrate further along the pay transparency continuum, then management and Human Resources in that organization need to be more disciplined in setting pay and in discussing pay with employees. Making pay transparency work requires good market data and an understanding of what skills and performance the organization needs from its employees.

The PayScale Pay Transparency Spectrum

pay-transparency-spectrum

As depicted in the webinar, there are five stages on the “PayScale Pay Transparency Spectrum.” The remainder of this post describes the five steps as outlined by Payscale and Bamboo HR, but many of the attitudes expressed regarding the pros and cons of each step are my own, and not necessarily those of the presenters.

1. What — Employees understand what they get paid — how much, when pay day is, etc. This is a bare minimum, and certainly all employers should at least be willing to tell their employees this much.

Even conservatives like me would not object to this step on the spectrum. If this is part of pay transparency, then I can easily support any company getting to this first level.

2. How — Employees are told how the organization uses data to make pay decisions. If the employer uses market pay data, then employees are told how market studies are conducted, or at least which companies are considered comparable. If jobs are graded on a point factor system, then the factors are described.

Opening up pay calculations to this level on the spectrum can be a big step in helping employees accept the fairness of pay scales and understanding the value of their job versus working at another company. But employees will ask questions about how jobs are defined and whether the benchmark companies are good comparators, so managers and HR do need to be educated in how to respond to such questions.

Again, I can readily support this step on the continuum for most companies. Assuming that an employer does have a pay structure with job grades and salary benchmarking, then the employer should be able to explain to employees how that system works. Not all companies will choose to pay to market, but if they don’t, they should be able to explain why (“we choose to be an entry-level employer, and we understand turnover will be higher,” for example). By contrast, when a company wants to be an employer of choice and to pay at or above market, then they should be happy to explain that philosophy.

3. Where — The third step on the spectrum is explaining to individual employees where they fall in the pay range. This goes beyond explaining what the salary range for a position is (Step 2) and requires telling individuals how their individual pay was set and what their future salary expectations are.

For certain (typically non-exempt) positions, salary increases are based on seniority or time-in-grade or the achievement of specific skill sets. In those instances, where pay increases are based on objective factors, it only makes sense to tell employees about the factors. In addition, when a company wants to focus on employee development and career opportunities, reaching this step on the transparency continuum can enrich the career planning and performance discussions.

The more subjective the criteria for offering pay increases, however, the more managers and HR need to be trained in how to discuss pay with employees. I think this was my hesitancy when I addressed the topic before. I’ve seen too many instances when managers handled these conversations poorly.

4. Why — The fourth step on the spectrum is explaining to employees why the organization pays the way it does. This requires a good understanding of the desired workplace culture and how pay fits with that culture. At this step, employers not only tell employees how they can increase their individual pay within the pay grades and ranges, but the organization also explains what is important for the future success of the organization.

At this level, management training is even more important than at Step 3. The questions about paying to market or not must be answered to deal with pay transparency at this level. Not all managers are able to talk effectively about workplace culture and employee engagement and retention. Particularly when managers themselves are not satisfied with their pay—or don’t understand how their own pay is set—they will not be effective communicators.

The webinar presenters stated that this level might be a good goal to reach on pay transparency, although they did not advocate it for all employers. They did emphasize the need for management training. I am not sure that many employers are ready for this level. Certainly many that I have worked with would need significant improvement in their management ranks before reaching full transparency about the links between pay philosophy and culture. But organizations with professional employees and highly skilled managers might well have this level as a goal.

5. Whoa! — Yes, this was the fifth level on the pay transparency continuum. This is the level that is often discussed in the media—where there are open discussions about which employee makes what salary, and everyone knows what everyone else gets paid.

The presenters indicated that this level might not be desirable for many organizations. And this is certainly where I balked when I wrote about pay transparency before. I’ve worked in departments where everyone had access to what everyone else made, and it was a difficult environment in which to manage. That may be in part because we were not as data-driven as we purported to be—subjective factors such as performance and prior job history played a role on where employees ended up within their salary ranges.

I’m still of the opinion that most organizations are not ready for this level of pay transparency. Some might be, but they had better be ready for a lot of difficult discussions with employees.

How to Reach the Desired Level

The last aspect of the webinar I’ll mention was the emphasis by the presenters on the need for the organization’s leaders to determine their pay philosophy and set a target for where on the pay transparency spectrum they want to be to suit their culture.

It’s likely that the organization will have to evolve a step at a time. An organization that currently does not even discuss pay ranges with employees is not going to get even to Step 4 without a few years of transition.

And the more transparent a system company leaders want to have, the more they need to invest in management training. Not all managers, and not all employees, will make the transition easily. Some turnover of those whose philosophy does not align with the desired culture will happen.

The webinar was a huge help to me in defining my personal perspective. I’m somewhere between Step 3 and Step 4 in what I would personally recommend. But I can now better articulate to clients what their options are and how they could develop from where they are at present on the continuum and why they might want to change.

Where is your organization currently on the pay transparency continuum?

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Are the Benefits of the SEC’s Pay Ratio Disclosure Rule Worth the Costs?


SEC emblemI don’t typically comment on Securities and Exchange Commission matters, because I don’t know much about the agency or its areas of regulation. But I do know something about managing compensation. So the August 5, 2015, SEC announcement of its final rule requiring public companies to disclose the ratio of their CEO’s compensation to the median compensation of its employees caught my eye.

Pay ratio disclosure sounds like a really bad idea to me. It is likely to cause consternation within the company, while not addressing the underlying concern over the growing pay disparity between CEOs and rank-and-file employees. The cost of this rule—both financial and in terms of morale—is not likely to be justified by any true benefit.Cost/Benefit Impact and Administrative Burden:

The SEC staff estimates the initial cost of complying with the pay ratio disclosure rule will be about $1.3 billion. Then there are ongoing costs of continuing to update the ratio as required by the regulation. These costs mean that citizens should require the SEC to articulate significant benefits, before the rule seems rational.

1.  Cost/Benefit Impact and Administrative Burden

I am not qualified to discuss the details of the new rule. For detailed descriptions, see SEC Finalizes “Flexible” Pay Ratio Disclosure Rules Under The Dodd-Frank Act: Companies Have Choices To Make, by Elizabeth Razzano, Mark Poerio, Gislar Donnenberg & Amelia Xu (Paul Hastings, Aug. 10, 2015), and SEC Adopts CEO Pay Ratio Disclosure Rule, by Holly J. Gregory, Sidley Austin LLP, (Aug. 14, 2015).

For an article arguing that the the calculation is skewed, see The big flaw in the SEC’s CEO pay-ratio rule, by S. Kumar (Fortune, Aug. 6, 2015).

2.  Employee Morale Concerns

Supposedly, the pay ratio disclosure rule will empower shareholders to challenge executive pay practices. However, shareholders of public companies have already had access to top executives’ pay in other public filings. The new comparison with rank-and-file employee pay is likely to upset the general employee population without providing much new data to shareholders.

As the Sidley Austin article rather blandly points out:

“Companies should be aware that, depending on the magnitude of pay ratios, these new disclosures may exacerbate existing concerns among investors, labor groups and others around executive compensation.”

More directly, in SEC Approval of Pay-Gap Rule Sparks Concerns, by Victoria McGrane & Joann S. Lublin (Aug. 5, 2015), The Wall Street Journal quoted Steven Seelig, a senior regulatory adviser for Towers Watson, as follows:

“This is going to raise all sorts of questions as to whether [an employee] believes they’re paid fairly both internally…and [compared] to competitors.”

From this same article:

“Affected businesses will spend more time explaining ‘to employees at all levels how they set pay,’ said Charlie Tharp, head of the Center on Executive Compensation, a Washington advocacy group for large employers.”

dollar-clip-art-1194985891178996774670a029.svg.medI do think I’m qualified to discuss the impact on morale of a pay disclosure rule. At one point in my career, I managed the Compensation Department of a large U.S. company. The Compensation Analysts who worked for me were competent and professional, yet even they had difficulty dealing with the emotions of pay comparisons. Although salaries within the company were generally kept confidential, these employees had access to all employees’ compensation, including each other’s.

  • The best analyst in the department was paid less than another with less experience. She understood that the new analyst was paid more because he came from a higher paid position within the company. Nevertheless, the conversation I had with my best analyst about why that pay differential was likely to continue for the foreseeable future was one of the more difficult conversations I have ever had as a manager.
  • Another analyst was a solid performer, but not as strong as two others. She knew full well that her salary increase was less than theirs one year. I could explain how I had arrived at my decisions, yet I could not prevent the demoralizing aspect of the policies that led to my decision.

While I do not mean to suggest that employers’ pay practices should be shrouded in secrecy, setting pay is a complicated process. Unless employees are on a strict seniority step system, every employee’s situation is unique. Even HR professionals do not fully understand all the factors, unless they are involved in a particular situation.

Moreover, because pay is seen as a measure of worth in the corporate world, emotion immediately steps in whenever we compare our pay with anyone else’s.

3.  Political Impact

Because the SEC members adopted this regulation along party lines—the three Democrat appointees SEC approved it, while the two Republicans opposed it—Congress and such organizations as the U.S. Chamber of Commerce will continue to attack its implementation. There is no consensus regarding the need for pay ratio disclosures.

The good news is that this regulation does not go into effect until corporate fiscal years starting in 2017, with disclosure first required in 2018. Nevertheless, law firms are recommending that public companies start collecting the information needed for compliance sooner rather than later.

Am I missing some of the benefits of the SEC pay ratio disclosure rule? Am I overstating the morale impact?

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Should You Have an HR Department? If so, Who Should Run It?


Change the Organization’s Design to Get Different Results; But Be Careful . . . You Will Get What You DesignI was intrigued to read a recent article in The Wall Street Journal, entitled, “Is It a Dream or a Drag? Companies Without HR,” by Lauren Weber & Rachel Feintzeig, dated April 9, 2014. My reaction: Of course any employer with more than a handful of employees needs someone with human resources responsibility. There are too many employment laws and regulations that can bite the unwary manager without some HR expertise readily available. But then, I’ve spent over thirty years in HR roles or dealing with others who worked in HR, so I might be biased.

Why HR Is Necessary

In an ideal world, managers could manage their people without the support of HR. Managers would all be good coaches and give direct feedback. Employees would all be rational and desirous of doing a good job.

But people are people. They are messy.

And someone needs to clean up the messes. In the workplace arena, it’s HR and employment lawyers who clean up the messes.

The traditional rule of thumb from my workforce planning days a decade ago was that for every 100 employees, a business should have one dedicated manager to handle human resources issues—including hirings, firings, and everything in between.

The Wall Street Journal article cited the Society of Human Resources Management as saying that in 2012, U.S. employers had on average 1.54 HR professionals for every 100 employees. So the trend seems to be toward increasing the ratio of HR to other employees, rather than doing away with HR.

HR Professionals Can Come From Anywhere

More interesting from my point of view, was a recent Workforce magazine article discussing what background HR managers should have. See “YourForce: Who Should Run HR?” by Mike Prokopeak, Workforce, April 6, 2014.

Mr. Prokopeak took the position that

“If HR desires to achieve the recognition it seeks as “a key contributor,” it must move to a new paradigm in which there is an agreed to body of knowledge in HR based on academic and applied research. Certifications could be required before one is employed in HR.”

While I believe that HR departments are necessary in any organization of more than a few dozen employees, I don’t necessarily think that HR managers need to have degrees in personnel management, or even in business administration.

I’ve known great HR managers who had backgrounds in engineering, in law (myself included), in communications, in finance, and in other fields as well. The field of human resources is extremely broad. Just a few of the fields in HR include

  • compensation design, which requires strong numerical skills,
  • benefits administration, which requires a knowledge of detailed regulations,
  • employee relations, where knowledge of labor laws and psychology would be helpful,
  • training and employee development, where a background in education and instructional design helps.

Anyone with a strong desire to improve the design of an organization or an aptitude to improve working relationships between people can find a role in HR.

While I support the development of certifications such as the PHR and SPHR, to show that HR professionals have some understanding of the theories and regulations impacting the workplace, I do not believe that a formal degree in HR is needed.

In your opinion, should HR professionals be required to have a particular degree?

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What Will Compensation Trends Be in 2014?


imagesFor HR professionals engaged in setting compensation scales and pay increases for 2014, it is important to be aware of signals from the labor market.

According to the Bureau of Labor Statistics in the Department of Labor,

“Compensation costs for civilian workers increased 2.0 percent for the 12-month period ending December 2013, essentially unchanged from the December 2012 increase of 1.9 percent. Wages and salaries increased 1.9 percent for the current 12-month period. In December 2012 the increase was 1.7 percent. Benefit costs increased 2.2 percent for the 12-month period ending December 2013. In December 2012 the increase was 2.4 percent.”

The BLS figures for private industry workers are similar.

The Consumer Price Index increase for the same period was 1.6%.  If prices are increasing at less than 2% per year, then a 2% increase in wages would provide some growth in real earnings for employees, albeit a small growth.

However, the Society for Human Resources Management says that average base pay increases for 2014 will be about 3 percent for the second year in a row in the U.S. SHRM’s source is the Compensation Planning Survey by Buck Consultants.  A 3% growth in wages would provide more relief to workers still buffeted in a struggling economy.

Yet one study from Payscale.com said that wages would increase by 4.5% in 2014.  See their Compensation Best Practices Report, 2014—The Year of The Great Balancing Act. I think this study is an outlier, and wage increases in most categories are likely to be in the 2-3% range.

Nevertheless, I do believe 2014 is likely to be a balancing act for employers in determining how to pay their employees. In a year where healthcare costs are uncertain and the prognosis is changing daily, setting wages is harder than ever.

coins imageWorkers, of course, care more about their personal wage increase than about averages. Employers continue to try to differentiate pay increases based on performance, according to SHRM. This means that more employees will receive less than 3% increases than receive more.

Most employers I’ve worked with recently have increased wages 2% or less each year for the past few years. I work with several non-profits, and their pay budgets remain extremely tight. They are less likely than for-profit companies to differentiate their increases based on performance, in part because little differentiation is possible with only a 2% increase budget.

We all hope that at some point the economy and the job market will improve. The question for employers—for-profit and non-profit employees alike—is when.

Another question is how employers can anticipate that point of improvement. And a third question is what they can do to retain their best employees—with compensation and with other tools for employee retention.

For more on compensation trends for 2014, see

2014 Salary Trends That Will Impact Staffing, by John Rossheim, on Monster.com

2014 US Salary Planning Information, from the Hay Group

2014 Compensation and Governance Outlook Report, from Equilar

What are your thoughts about increasing wages for your employees, and about employee retention generally?

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Fair Labor Standards Act Bites Employers of Unpaid Interns


imagesThe Fair Labor Standards Act (FLSA) is an archaic statute that still packs a punch. Passed in 1938, when the nation was in the throes of the Depression, the law was designed to maximize the number of jobs created by limiting the number of hours that employees could work.

In essence, the FLSA requires employers (a) to pay at least a minimum wage, and (b) to pay overtime wages (at 1.5 times the base wage rate) to employees who work more than 40 hours/week. Employees are covered by this law, unless they fit into an exemption. There are four primary categories of “exempt” employees: managerial/executive employees, administrative employees, professional employees, and outside sales employees.

FLSA litigation has expanded in the last ten to fifteen years. Many lawsuits arise out of disputes over whether an employee is exempt or non-exempt. Other cases deal with what time is compensable (time spent donning and doffing uniforms, clocking in, commuting time, breaks, etc.)

These cases are increasingly brought as class actions – with plaintiffs’ attorneys seeking huge damage awards across the class. If a thousand employees making even just $10/hour are underpaid for fifteen minutes/day for 250 working days in a year for a two year limitations period, the damage award – at straight time! – is a total of $1,250,000. And in many cases, the damages are at higher wages rates, or for overtime, or for a three year limitations period, or for more employees. Plus, damages can be doubled in a case of intentional wrongdoing.

And the attorneys always get their fees on top of the wage awards. These can be time-consuming cases, and are therefore lucrative for lawyers.

Office Clocks Showing Different TimesThe FLSA requirements and the recent recession have given rise to an increase in cases involving unpaid interns. In today’s job environment, recent college graduates and others seeking employment are often willing to work for nothing to get a foot in the door. Many employers want to reduce their costs, and will use unpaid interns for free labor. This practice has been particularly prevalent in the media industry – both old and new media.

For more on the prevalence of unpaid interns, see the Wall Street Journal article, Interns Are Increasingly the Route to Winning a Job, by Melissa Korn, published on June 6, 2013, and the MSNBC story The unpaid internship racket, by Timothy Noah, June 20, 2013.

Under a Department of Labor interpretation (Fact Sheet #71, issued in April 2010), the criteria for using unpaid interns are:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Now, why would an employer use an unpaid intern if the employer provides no immediate advantage from the intern’s activities, and, in fact, the employer’s business might even be impeded by the intern? Obviously, DOL does not like unpaid interns.

Even when the interns are still students, the practice of using them as unpaid workers is problematic. It is easier in student situations to show the intern is receiving training and that the experience is for the benefit of the student. But still, their presence probably provides some advantage to the employer, or they wouldn’t be there.

??????????????????In Glatt v. Fox Searchlight Pictures, a recent federal case in New York, two interns who worked on Fox movie productions sued for wages after their unpaid internships ended. The district court judge found that these interns were employees, and permitted them to pursue a class action against Fox. The judge ruled that, even though the interns’ work was menial (filing, etc.), it was essential to the business and would have required paid employees if the interns had not been there.

I don’t have much sympathy for for-profit companies seeking to use unpaid labor. While I believe that the FLSA needs substantial updating to be relevant to today’s workforce, employers should design their organizations to pay for the work they need done.

When I was practicing employment law, I advised my clients, even those in the media business, that they faced a substantial uphill battle to justify using unpaid interns. I didn’t like the practice then, and it is even riskier now.

As one commentator has opined,

Employers that use unpaid interns should pay careful attention to this issue. It is far better to scrutinize interns under the DOL’s six factors before the agency, or a group of plaintiffs, swoop in and do it for you. It is even better to formalize the relationship in a written internship agreement that formally spells out how each of these six questions is answered in your favor. Or maybe it is best simply to assume that except in rare cases, there is no such animal as an “unpaid intern,” and you should simply accept the fact that if you are going to label entry-level employees as interns, you need to pay them for their services.

I think using unpaid interns in a non-profit employer is a closer question. In the non-profit context, when are people employees and when are they volunteers? For example, a non-profit social service agency may pay a receptionist, but may have a volunteer fill in when the employee is on vacation. Or a church may hire a groundskeeper, but rely on parishioners to perform much of the grounds-keeping labor.  Shouldn’t these practices be acceptable?

When do you think unpaid interns should be permitted?

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How Managers Can Impact Employee Retention


Business Team Signing ContractFor years corporate leaders and HR professionals have debated the question of employee retention. Which are the best retention tools? Should we offer people more pay and benefits? Or give them meaningful work and better bosses?

The answer, of course, is both.We all know employees who have left because another company offered them a higher salary or a benefits package that better met their needs. And we all know employees who have left to escape a terrible manager or an unmanageable workload.

In a November 28, 2012 post, 4 Ways to Rock Your Employee Benefits & Rewards Program, Jessica Miller-MerrellBlogging4Jobs, wrote: 

“Money is (and probably always will be) the number one way to recruit, retain and hire qualified job seekers.” 

Not surprisingly, a 2010 World at Work study found that “total rewards structures, programs and policies influence employee engagement.”  But this report also concluded that

“When the impact of different categories of rewards programs on engagement was studied, it was discovered that base pay and benefits had the overall weakest relationship with the organization’s ability to foster high levels of employee engagement and motivation compared to incentives, intangible rewards and quality of leadership on engagement. Quality of leadership had the strongest relationship with effectively engaging and motivating employees.”

In an article for Forbes, Why Are So Many Employees Disengaged?, January 18, 2013, Victor Lipman states that most employees are disengaged at work because of the relationships with their immediate supervisor. The reason these relationships are often a problem is because:

“Put simply, the qualities commonly associated with management and leadership – being authoritative, decisive, forceful, perhaps somewhat controlling, if not moderated by a high degree of awareness as to how one comes across and is perceived by others, are also qualities that have the potential to easily alienate those on the receiving end.”

Thus, while pay is critically important for retention, the manager relationship is what engages your staff while they work for you.

MP900439486Yet people get promoted into management for reasons quite different than what makes people good managers. Most of us have to work hard to be good managers.

As I studied the question of employee retention, I came to care less whether pay or manager relationships were more important for engagement and retention than about what each person in the organization could do to impact these important work issues. It is only when we take the theory and conclusions of management studies and apply them to the work we do each day that we can develop our own action plans to improve our work life and the lives and performance of those we work with.

Most of us have some control over how much our employees get paid. Managers often have input into pay decisions, even when employees are on a step pay scale. Where employees are on a merit pay scale, managers can allocate more money to better performers. Nevertheless, with the checks and balances in place in most modern corporations, only a few top leaders can have significant impact on the pay of their subordinates.

Managers have more control over the day-to-day work environment and how they interact with their employees.

So, what can you do to be a good manager? Volumes have been written on this topic, but here are Lipman’s suggestions (a good starting place):

  • Listen to what your subordinates say
  • Be perceptive about what motivates your staff and what they are dealing with
  • Communicate openly and be approachable
  • Stay calm, don’t get angry
  • Demonstrate true concern for your direct reports’ well-being

All this doesn’t mean that you avoid conflict or tough decisions. It does mean you act ethically and with appreciation for what each of your staff members brings to the workplace and the challenges each person faces.

Is it easy? No. Is it rewarding to see where you make a difference in the lives of those you work with? Yes.

What are you doing within your authority to improve the work environment for the people who work for you?

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